When the Reserve Bank of Australia (RBA) started increasing the cash rate in May 2022, many commentators predicted that there would be a sharp increase in the number of people unable to make their mortgage repayments. But despite the fact the cash rate has increased from 0.10% to 4.35% during that time, mortgage arrears have barely increased.
Before we discuss why, let’s consider the evidence.
If there was a mortgage arrears crisis, you’d expect the number of distressed property listings (i.e. urgent sales) would be high and rising. However, as the most recent data from SQM Research indicates, there were only 5,252 distressed listings throughout Australia in January – which was 12.7% lower than the year before.
Furthermore, the share of mortgages that are 90 or more days in arrears is below the historical average, according to the Reserve Bank of Australia’s (RBA) most recent Financial Stability Review, from October 2023.
This share of mortgage arrears has been trending higher, but is still very low.
As the RBA explained in its most recent Financial Stability Review, in October 2023, the “vast majority” of borrowers who have transitioned from fixed-rate loans with ultra-low interest rates to higher-rate variable loans have “have managed the transition to higher interest rates well”.
“Arrears rates among this group have increased a little, in line with the increase observed among variable-rate borrowers,” the RBA added.
The RBA has also reported that people who are still on fixed rates are also well-placed.
“The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments. The majority also have large savings buffers.”
Five reasons borrowers are dealing with higher rates
So why, despite higher interest rates, are mortgage arrears so low?
One key reason is that the labour market is very strong – because, for the average person, the key to paying off a mortgage is having a steady job. Even though unemployment has been trending higher – over the year to December 2023, unemployment rose from 3.5% to 3.9% – it’s still very low.
A second reason is that many households have enjoyed rising incomes, whether due to switching to higher-paid jobs (which is easier when unemployment is so low), working more hours or receiving cost-of-living bonuses. “This is especially true for those on lower incomes, with many having experienced a lift in real incomes that has outpaced growth in their base hourly wage rate,” according to the RBA.
Third, the typical borrower has found ways to adapt. That may include switching jobs or working more hours, as mentioned above, or cutting back on spending.
Fourth, the pandemic helped a lot of borrowers accumulate large savings buffers. “Most households entered the period of high inflation and rising rates in a strong financial position because of substantial fiscal and monetary policy support and reduced consumption opportunities during the pandemic. Low interest rates had also supported borrowers, including borrowers on fixed rates, to increase their savings over this time,” the RBA said.
Fifth, as the graph shows, the average borrower got well ahead on their mortgage before interest rates started rising. Furthermore, even as interest rates climbed in 2023, many borrowers continued making extra repayments into offset accounts or redraw facilities.
Where to expect from interest rates
Thankfully, there appears to be good news on the horizon for interest rates.
That’s because inflation (currently 4.1%) has been declining steadily, which means the RBA may conclude that inflation may fall to its target range of 2-3% without the need for any further cash rate increases.
The Reserve Bank governor, Michele Bullock, is not yet talking rate cuts – indeed, in early February, she even said the RBA could not rule out raising rates. However, most economists believe the next move in interest rates will be down. Furthermore, all of the big four banks expect the RBA to start cutting rates in the final quarter of 2024.
Budget for higher rates, refinance to lower rates
Whatever happens with interest rates, we’ve learned two important lessons over the past couple of years.
First, interest rates will go up and down over the course of a 30-year loan term, so it’s important to always budget for higher rates.
Second, now that we’re no longer living in – and may never return to – an environment of record-low interest rates, it’s important not to pay a higher interest rate than necessary. So if it’s been at least two years since you took out your home loan, we strongly recommend you speak to Shore Financial about refinancing. The mortgage market is always changing, so even though you probably got a good rate when you took out your home loan, it may no longer be competitive.
Shore Financial can help you get a new home loan or refinance an existing loan. To discuss your options, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.
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